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Why Facebook's Virtual Reality Ambitions Are an Uphill Battle

The skills Facebook demonstrated in building a social network don't map well to virtual reality.

Turning a software company into a hardware company is easier said than done, but Facebook's (NASDAQ:FB) attempt to add virtual reality (VR) to its social media empire may be a Herculean task. Tech companies simply aren't built to make strategic transitions like Facebook is trying to make, and there may be structural reasons it will fail in virtual reality.

We've seen similar stories before. IBM dominated early mainframe computers but gave up the personal computer (PC) to Microsoft and Intel because it wasn't able to adapt to the needs of the PC market. Microsoft dominated PC software but tried to shoehorn Windows onto mobile devices, eventually ceding the smartphone market to Apple. Today, we're watching Apple fall behind in artificial intelligence and virtual assistants to Amazon and Google. There's a cycle in technology, and just because a company dominates one era doesn't mean it'll dominate the next. It's Facebook's success with its social network that I think will make it tough for Facebook to make the transition to virtual reality, despite spotting the opportunity early.

Image source: Oculus.

Social network skills don't align with virtual reality

One way to understand the uphill battle Facebook is taking on in virtual reality is to look at the skills required to succeed in each market. Below are a few of the key differences in Facebook.com and Oculus as businesses.

Item

Facebook.com

Oculus

Hardware or software

Software

Both

Paying customer

Businesses or advertisers

Individual users

Sales channel

Online platform

Retail (online and brick and mortar)

Table by the author.

These differences are important, so I'll highlight how they can impact virtual reality one by one.

Hardware is hard

Developing hardware and software couldn't be more different, and succeeding in one doesn't mean a company can succeed in the other (see Microsoft Zune). For example, software can be tested in beta releases and can be changed and updated almost immediately based on new feedback. When a hardware design is set, it can be years before it's changed. Oculus Rift is a perfect example. The VR headset was launched more than two years ago, and there haven't been meaningful changes to the hardware design over that time frame.

An example of Facebook's inexperience in hardware showed up in March when Oculus Rifts around the world were knocked out because the company forgot to renew a security certificate. Oculus Rift literally shut down worldwide because of an administrative error, a mistake a company the size of Facebook shouldn't make.

The customer matters

One thing investors should always ask themselves when analyzing a company is: Who pays the bills?

At Facebook, the 2 billion people with Facebook accounts around the world aren't the ones who pay the company's bills; it's businesses who advertise on the social network who pay the bills. If you want to know why Facebook was careless with user data, you can go back to the fact that users don't pay the company, so it has an incentive to find ways to create value or monetize their data elsewhere.

In virtual reality, the user is the one paying the bills. If Oculus can't serve what users want from both an experience and a content perspective, then its opportunity will be limited. This is why the software issue I highlighted above is a black eye for Oculus.

There's also no network to attract customers in virtual reality. On Facebook.com, the fact that your friends are on the network makes you more likely to use the social network, which draws advertisers, and on and on. It's the network that's a big reason users will quickly forget the data Facebook shared with entities like Cambridge Analytica. There's no similar draw pulling customers into virtual reality or keeping them there.

Sales are a huge challenge in virtual reality

I think one of the biggest challenges Facebook faces in virtual reality is getting headsets into customers' hands and getting them to try VR before they buy a setup. Consumers aren't going to adopt VR on the scale of tens of millions of devices if they've never tried it -- and this is where Facebook lacks a channel.

There's no free app on your desktop or mobile device like there was with Facebook.com, and reaching customers to try new technology is hard. Right now, the company is leaning on Best Buy as a key sales channel; it's one of the only places you can try an Oculus Rift headset before spending thousands of dollars on the headset and a VR-ready computer. I don't think this sales model will work long-term and will ultimately limit the opportunity for VR to a few million devices, which is what's sold today.

Customer service is another can of worms that Oculus hasn't figured out. Even Apple, for instance, was compelled to open stores in high-foot-traffic areas so potential customers could experience its products and so it could better serve its customers. Facebook doesn't have a similar channel. Once again, the needs of a software company don't map well to a hardware company.

Facebook is facing an uphill battle

According to Superdata, the virtual reality market is expected to grow from $2.2 billion in 2017 to $19.0 billion in 2021, so Facebook has a huge incentive to make Oculus an industry leader. But it's losing the battle to Sony right now. Sony has sold more than 2 million PlayStation VR headsets, which are selling at about 2.5 times the speed of Oculus Rift.

Facebook and Oculus hope the launch of Oculus Go will inspire a new round of VR adoptions, but the sales channel is still unclear, and Facebook's incentives may not line up with virtual reality consumers' needs. The best example of this might be Facebook Spaces, a virtual hangout for friends in VR. Facebook is trying to make virtual reality into a social network, but I have my doubts that customers want the same thing from both Facebook.com and Oculus. Hopefully, Facebook can see its weaknesses in time, but history has shown that tech companies have a hard time transitioning to a new technology paradigm -- and Facebook may already be making the same mistakes predecessors have.